Is there any way that America’s current do-it-yourself retirement system won’t end up becoming a recipe for complete and total disaster?
Think about it: First, we run the whole thing through the cheapskate employers who treat workers like they’re an ungrateful ship of galley slaves. Then we combine those bosses with a predatory financial services industry that routinely pays millions or even billions in criminal fines as the normal course of business. And we toss in the Internal Revenue Service, just to make sure there’s lots of paperwork fun.
Finally, we put all the actual investment decisions into the hands of the financial savvy, fiscally disciplined and far-sighted average Americans, a group that tends to consider lottery tickets a good long-term bet. Seriously: If you ask 10 people what the “k” in 401(k) retirement accounts stands for, most of them are going to answer, “Um ... Kardashian?”
Surprise! Low rates and high fees
So it’s no surprise that a new report from the Government Accountability Office finds this bubbling gumbo of indifference, avarice, red tape and ignorance has stewed up a mind-boggling retirement rip-off called “forced IRAs.”
These are Individual Retirement Accounts that are created when you leave a 401(k) account behind at an old job. If the balance is less than $5,000 the employer can dump it into an IRA. To avoid having your old boss or the big financial services firm handling the account engage in any hanky-panky with your neglected nest egg, such as putting all the money into the Outer Slobovian Yak Pelt Futures Fund, the money must go into a low-risk certificate of deposit or money market account.
Unfortunately, low risk means low rates, with those accounts paying 2.05 percent at the top to as little as 0.01 percent at the bottom. But remember, inflation is 1.3 percent. So, don’t go picking out wallpaper for that retirement condo in sunny Florida because, at those rates, most people actually are losing money.
In fact, you could be losing it all. Because those big financial services firms that now have your forgotten 401(k) cash in their clutches do what financial services firms do best, and I don’t mean, “Fail to beat the market.” I mean charge you fees. A fee to set up the IRA you didn’t know you were setting up in the first place, of as much as $100. And a yearly fee to maintain this unknown IRA — in what is basically a savings account — of as much as $115.
According to the GAO, out of 19 types of forced IRAs it examined, 13 had returns low enough and fees high enough that they will cut a worker’s $1,000 account balance down to $0 within 30 years. Although there was one over-achiever that could do it in just nine years.
“Without alternatives to forced-transfer IRAs, current law permits billions in participant savings to be poorly invested for the long-term,” the report concluded. And billions it is: From 2004 through 2013, the GAO found workers who quit left behind more than 16 million workplace accounts, worth a total of $8.5 billion.
That’s how I roll (over)
It’s easy to say those workers have only themselves to blame, except that it’s much, much easier to be confused and befuddled by the entire process or to just assume, as many of us do, that your money will safely ride out the investments you originally chose in your plan, just as it would if you had contributed more than $5,000.
It’s never made sense to leave the money behind when you can roll it over directly into your own IRA and pick better investments at lower cost. Now this new GAO report shows that it’s not just insensible, it’s downright dangerous. To fix it, set up an IRA with any provider and arrange a rollover from your ex-employer. If you’re unsure of just what old jobs might hold an old 401(k), or your old employer is out of business, you can check with the Social Security Administration and request form SSA-L99-C1.
The punch line here is that the option of forced IRAs was created to protect workers from having their old 401(k)s cashed out, which would cost most of us as much as 35 percent in taxes and penalties. But compared to what the big financial services firms are doing now, the bite that the tax man used to take looks like just a nibble.
Brian O’Connor is author of the award-winning book, “The $1,000 Challenge: How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government Cheese.”